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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2004 or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 0-13124
-----------------------------------------
COVER-ALL TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-2698053
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18-01 Pollitt Drive, Fair Lawn, New Jersey 07410
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(Address of principal executive offices) (Zip Code)
(201) 794-4800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: [X] No: [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 2, 2004, the registrant had 15,674,565 shares of common stock, par
value $.01 per share, outstanding.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004
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PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 (Unaudited)
and December 31, 2003 (Audited)..................................... 3
Consolidated Statements of Operations for the three and six
months ended June 30, 2004 and 2003 (Unaudited)..................... 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003 (Unaudited)..................... 6
Notes to Consolidated Financial Statements (Unaudited).............. 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 12
ITEM 3. Qualitative and Quantitative Disclosures
About Market Risk................................................... 16
ITEM 4. Controls and Procedures............................................. 16
PART II: OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds........................... 17
ITEM 4. Submission of Matters to a Vote of Security Holders................. 17
ITEM 6. Exhibits and Reports on Form 8-K.................................... 17
SIGNATURES................................................................... 19
. . . . . . . . . .
-2-
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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JUNE 30, DECEMBER 31,
2004 2003
------------------ -------------------
(UNAUDITED) (AUDITED)
ASSETS:
Current Assets:
Cash and Cash Equivalents......................................... $ 710,531 $ 1,193,173
Accounts Receivable (Less Allowance for Doubtful Accounts
of $25,000 and $25,000 in 2004 and 2003, respectively)......... 1,115,457 1,680,082
Other Receivable.................................................. 984 309
Prepaid Expenses.................................................. 331,169 353,063
------------------ -------------------
Total Current Assets.............................................. 2,158,141 3,226,627
------------------ -------------------
Property and Equipment - At Cost:
Furniture, Fixtures and Equipment................................. 1,387,440 1,376,998
Less: Accumulated Depreciation................................... (1,227,684) (1,245,631)
------------------ -------------------
Property and Equipment - Net...................................... 159,756 131,367
------------------ -------------------
Capitalized Software (Less Accumulated Amortization of
$6,684,030 and $6,197,478, respectively).......................... 2,011,219 1,903,470
------------------ -------------------
Deferred Financing Costs (Net of Accumulated Amortization of
$94,382 and $77,146, respectively)................................ 146,929 164,165
------------------ -------------------
Other Assets......................................................... 59,612 59,335
------------------ -------------------
Total Assets...................................................... $ 4,535,657 $ 5,484,964
================== ===================
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
-3-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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JUNE 30, DECEMBER 31,
2004 2003
----------------- ------------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current Liabilities:
Accounts Payable.................................................. $ 170,186 $ 122,146
Accrued Liabilities............................................... 444,772 375,546
Convertible Debentures ........................................... 193,145 99,484
Convertible Debentures - Related Party............................ 11,362 5,852
Unearned Revenue.................................................. 1,529,687 2,446,280
----------------- ------------------
Total Current Liabilities......................................... 2,349,152 3,049,308
----------------- ------------------
Long-Term Liabilities:
Convertible Debentures............................................ 2,206,855 2,300,516
Convertible Debentures - Related Party............................ 88,638 94,148
----------------- ------------------
Total Long-Term Liabilities....................................... 2,295,493 2,394,664
----------------- ------------------
Total Liabilities................................................. 4,644,645 5,443,972
----------------- ------------------
Commitments and Contingencies........................................ -- --
----------------- ------------------
Stockholders' Equity:
Common Stock, $.01 Par Value, Authorized 75,000,000 Shares;
17,871,968 and 17,846,218 Shares Issued and 15,371,968 and
15,346,218 Shares Outstanding, Respectively..................... 178,720 178,462
Capital In Excess of Par Value....................................... 26,157,902 26,150,447
Accumulated Deficit.................................................. (25,742,610) (25,584,917)
Treasury Stock - At Cost - 2,500,000 Shares.......................... (703,000) (703,000)
----------------- ------------------
Total Stockholders' Equity (Deficit)................................. (108,988) 40,992
----------------- ------------------
Total Liabilities and Stockholders' Equity........................... $ 4,535,657 $ 5,484,964
================= ==================
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
-4-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
REVENUES:
Licenses.................................... $ 444,258 $ 57,600 $ 787,008 $ 288,100
Maintenance................................. 1,141,000 1,114,462 2,302,490 2,235,805
Professional Services....................... 187,641 398,475 423,261 939,475
Applications Service Provider ("ASP")
Services................................. 154,198 153,473 308,396 318,973
-------------- -------------- -------------- --------------
TOTAL REVENUES.............................. 1,927,097 1,724,010 3,821,155 3,782,253
-------------- -------------- -------------- --------------
COST OF REVENUES:
Licenses.................................... 346,310 197,191 669,166 405,116
Maintenance................................. 737,719 628,718 1,370,355 1,294,437
Professional Services....................... 108,501 111,925 229,752 259,104
ASP Services................................ 18,440 51,588 42,647 112,695
-------------- -------------- -------------- --------------
TOTAL COST OF REVENUES...................... 1,210,970 989,422 2,311,920 2,071,352
-------------- -------------- -------------- --------------
DIRECT MARGIN............................... 716,127 734,588 1,509,235 1,711,001
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Sales and Marketing......................... 378,639 297,525 669,978 498,181
General and Administrative.................. 288,264 280,443 587,802 583,530
Research and Development.................... 161,174 106,230 312,914 266,574
-------------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES.................... 828,077 684,198 1,570,694 1,348,285
-------------- -------------- -------------- --------------
OPERATING INCOME (LOSS)..................... (111,950) 50,390 (61,459) 362,716
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest Expense............................ (47,869) (48,982) (95,737) (97,437)
Interest Expense - Related Party............ (1,994) (1,994) (3,989) (3,967)
Interest Income............................. 1,249 3,008 3,492 7,427
-------------- -------------- -------------- --------------
TOTAL OTHER INCOME (EXPENSE)................ (48,614) (47,968) (96,234) (93,977)
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES........... (160,564) 2,422 (157,693) 268,739
-------------- -------------- -------------- --------------
INCOME TAXES (BENEFIT)........................... -- 218 -- 24,186
-------------- -------------- -------------- --------------
NET INCOME (LOSS)................................ $ (160,564) $ 2,204 $ (157,693) $ 244,553
============== ============== ============== ==============
BASIC EARNINGS (LOSS) PER COMMON SHARE........... $ (0.01) $ 0.00 $ (0.01) $ 0.02
============== ============== ============== ==============
DILUTED EARNINGS (LOSS) PER COMMON SHARE......... $ (0.01) $ 0.00 $ (0.01) $ 0.01
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR BASIC EARNINGS (LOSS) PER
COMMON SHARE................................ 15,367,000 15,336,000 15,358,000 15,336,000
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR DILUTED EARNINGS (LOSS) PER
COMMON SHARE................................ 15,367,000 24,180,000 15,358,000 24,112,000
============== ============== ============== ==============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
- 5 -
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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SIX MONTHS ENDED JUNE 30,
------------------------------------
2004 2003
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss).................................................... $ (157,693) $ 244,553
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided From (Used For) Operating Activities:
Depreciation.................................................. 44,729 43,335
Amortization of Capitalized Software.......................... 486,552 240,615
Amortization of Deferred Financing Costs...................... 17,236 17,236
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable........................................... 564,625 296,264
Prepaid Expenses.............................................. 21,894 178,436
Other Receivable.............................................. (675) 230,205
Other Assets.................................................. (277) --
Increase (Decrease) in:
Accounts Payable.............................................. 48,040 (159,426)
Taxes Payable................................................. -- (55,714)
Accrued Liabilities........................................... 69,226 (341,629)
Unearned Revenue.............................................. (916,593) (844,293)
---------------- ----------------
Net Cash (Used For) Provided From Operating Activities.............. 177,064 (150,418)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures................................................ (73,118) (52,647)
Capitalized Software Expenditures................................... (594,301) (444,363)
---------------- ----------------
Net Cash (Used For) Provided From Investing Activities.............. (667,419) (497,010)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Stock Options............................. 7,713 135
---------------- ----------------
Net Cash Provided From (Used For) Financing Activities.............. 7,713 135
---------------- ----------------
CHANGE IN CASH AND CASH EQUIVALENTS....................................... (482,642) (647,293)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD........................... 1,193,173 2,063,411
---------------- ----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD................................. $ 710,531 $ 1,416,118
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIODS FOR:
Interest............................................................ $ 95,737 $ 97,437
Interest - Related Party............................................ 3,989 3,967
Income Taxes........................................................ -- 79,900
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
- 6 -
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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[1] GENERAL
For a summary of significant accounting policies, refer to Note 1 of Notes to
Consolidated Financial Statements included in Cover-All Technologies Inc.'s (the
"Company") Quarterly Report on Form 10-K for the year ended December 31, 2003.
While the Company believes that the disclosures herein presented are adequate to
make the information not misleading, these consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest annual report. Certain amounts
for the prior period have been reclassified to conform with the current period's
financial statement presentation. The financial statements include on a
consolidated basis the results of its subsidiary. All material intercompany
transactions and balances have been eliminated.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments which are necessary to present fairly the Company's
consolidated financial position as of June 30, 2004, and the results of their
operations for the three and six month periods ended June 30, 2004 and 2003, and
their cash flows for the six month periods ended June 30, 2004 and 2003. Such
adjustments are of a normal and recurring nature. The results of operations for
the three and six month periods ended June 30, 2004 and 2003 are not necessarily
indicative of the results to be expected for a full year.
[2] CONVERTIBLE DEBENTURES
On March 31, 1997, we sold $3,000,000 of 12.5% Convertible Debentures due March
2002 (the "1997 Debentures") to an institutional investor. The 1997 Debentures
were sold at face value, pay interest quarterly and were convertible, in whole
or in part, into shares of our common stock at $1.25 per share, subject to
adjustment.
On June 28, 2001, we raised $1,800,000 through a private placement of 8.00%
convertible debentures due 2008 (the "2008 Debentures") with investors headed by
the Renaissance Capital Group, Inc. of Dallas, Texas pursuant to Convertible
Loan Agreements entered to with each of the investors. An aggregate of
$1,400,000 was sold to the Renaissance US Growth and Income Trust PLC (traded on
the London Stock Exchange) and BFS US Special Opportunities Trust PLC, which are
managed by Renaissance. Also, an aggregate of $400,000 was sold to three other
private investors including John Roblin, our Chairman of the Board, President
and Chief Executive Officer. The related financing costs incurred of $187,090 in
connection with establishing these debentures have been deferred and are being
amortized over the life of the debt.
Immediately upon receipt of the funds, we used $1,660,000 of the proceeds to
fully settle the remaining principal amount of the 1997 Debentures. We
recognized a gain on the extinguishment of debt of $1,340,000 in June 2001. The
balance of the funds raised from the transaction were used for working capital
purposes. The 2008 Debentures are convertible into shares of our common stock,
initially at $0.50 per share, subject to adjustment in accordance with the terms
of the parties' respective loan agreements.
In March 2002, the holders under the Convertible Loan Agreements agreed to amend
one of the financial covenants for the quarters ending March 31, June 30 and
September 30, 2002. As consideration for such amendments, we issued to such
holders an aggregate of 128,572 warrants to purchase such number of shares of
our common stock at an exercise price of $0.22 per share. The warrants expire in
2007 and became exercisable in equal monthly installments on each of March 31,
2002, June 30, 2002 and September 30, 2002, respectively. The $16,913 estimated
fair market value of the warrants have been charged to deferred financing costs
and were amortized over the amendment period.
On August 21, 2002, we, by amendment to the 2001 Debentures, raised an
additional $700,000 through the sale of 8.00% convertible debentures due 2009
(the "2009 Debentures") to Renaissance US Growth and Income Trust PLC and BFS US
Special Opportunities Trust PLC. The funds raised from the transaction were used
for working capital purposes. The 2009 Debentures are convertible into shares of
our common stock initially at $0.30 per share, subject to adjustment. The
related financing costs incurred of $54,220 in connection with establishing the
2009 Debentures
- 7 -
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
have been deferred and are being amortized over the life of the debt. The
Convertible Loan Agreements currently prohibit the payment of dividends without
written consent of the holders.
The issuance of the 2009 Debentures caused a reduction in the conversion price
of the 2008 Debentures from $0.50 per share to $0.30 per share.
The 2008 Debentures and 2009 Debentures mature on July 1, 2008 and September 1,
2009, respectively, unless the debentures are earlier redeemed by us or the
holder upon the occurrence of certain events specified in the debentures or
converted into shares of our common stock at the holder's option.
We may redeem the debentures for cash at 101% of the principal amount, together
with accrued and unpaid interest through the redemption date, upon the
occurrence of certain events specified in the debentures.
If the 2008 Debentures and 2009 Debentures are not sooner redeemed or converted,
we will be required to pay, commencing on July 1, 2004 and July 1, 2005,
respectively, monthly principal installments in the amount of ten dollars ($10)
per thousand dollars ($1,000) of the then remaining principal amount of such
debentures, and at maturity we will be required to pay the remaining unpaid
principal amount.
At December 31, 2003, principal payments due on the convertible debentures are
as follows:
2004 $ 105,336
2005 220,122
2006 247,061
2007 218,991
2008 1,240,210
Thereafter 468,280
------------
TOTAL $ 2,500,000
============
In July 2004, the holders of the 2008 Debentures converted an aggregate of
$90,780 in principal of such debentures into a total of 302,597 shares of our
common stock at the conversion price of $0.30 per share.
[3] EARNINGS PER SHARE DISCLOSURES
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations:
FOR THE THREE MONTHS ENDED
JUNE 30, 2004
----------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------------ ------------------ ------------------
Basic EPS:
Income (Loss) Available to Common
Stockholders...................................... $ (160,564) 15,367,424 $ (0.01)
Interest Reversal Convertible Debentures
(Net of Tax)....................................... -- -- --
Effect of Dilutive Securities:
Exercise of Options................................ -- -- --
Exercise of Warrants............................... -- -- --
Conversion of Convertible Debentures............... -- -- --
------------------ ------------------ ------------------
Diluted EPS:
Income (Loss) Available to Common Stockholders
Plus Assumed Conversions......................... $ (160,564) 15,367,424 $ (0.01)
================== ================== ==================
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2004
----------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------------ ------------------ ------------------
Basic EPS:
Income (Loss) Available to Common
Stockholders...................................... $ (157,693) 15,357,917 $ (0.01)
Interest Reversal Convertible Debentures
(Net of Tax)...................................... -- -- --
Effect of Dilutive Securities:
Exercise of Options................................ -- -- --
Exercise of Warrants............................... -- -- --
Conversion of Convertible Debentures............... -- -- --
------------------ ------------------ ------------------
Diluted EPS:
Income (Loss) Available to Common Stockholders
Plus Assumed Conversions......................... $ (157,693) 15,357,917 $ (0.01)
================== ================== ==================
The Company's options and warrants were not included in the computation of EPS
for the periods ended June 30, 2004 because to do so would be antidilutive. The
Company's convertible debt does not affect the EPS calculation for the periods
ended June 30, 2004 because it would be antidilutive.
FOR THE THREE MONTHS ENDED
JUNE 30, 2003
----------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------------ ------------------ ------------------
Basic EPS:
Income Available to Common
Stockholders...................................... $ 2,204 15,336,218 $ 0.00
Interest Reversal Convertible Debentures
(Net of Tax)....................................... 30,000 -- --
Effect of Dilutive Securities:
Exercise of Options................................ -- 431,018 --
Exercise of Warrants............................... -- 79,803 --
Conversion of Convertible Debentures............... -- 8,333,333 --
------------------ ------------------ ------------------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions......................... $ 32,204 24,180,372 $ 0.00
================== ================== ==================
- 9 -
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2003
----------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------------ ------------------ ------------------
Basic EPS:
Income Available to Common
Stockholders...................................... $ 244,553 15,336,218 $ 0.02
Interest Reversal Convertible Debentures
(Net of Tax)...................................... 60,000 -- --
Effect of Dilutive Securities:
Exercise of Options................................ -- 368,129 --
Exercise of Warrants............................... -- 74,176 --
Conversion of Convertible Debentures............... -- 8,333,333 --
------------------ ------------------ ------------------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions......................... $ 304,553 24,111,856 $ 0.01
================== ================== ==================
Options to purchase 1,282,250 shares of common stock at prices ranging from $.60
to $4.00 per share were outstanding at June 30, 2003, but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the period ($.52).
[4] STOCK OPTION AND STOCK PURCHASE PLANS
We have adopted several stock-based compensation plans that provide for the
grant of options to our employees and non-employee directors. All options under
these plans vest over terms of zero to three years. Options may be granted as
incentive or non-qualified stock options and are exercisable at a price and time
as determined by the Board of Directors on the grant date.
We account for stock-based employee compensation using the intrinsic value
method in accordance with APB Opinion No. 25 and related interpretations which
generally require that the amount of compensation cost that must be recognized,
if any, is the quoted market price of the stock on the measurement date, which
is generally the grant date, less the amount the grantee is required to pay to
acquire the stock. Alternatively, Statement of Financial Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," employs fair value-based
measurement and generally results in the recognition of compensation expense for
all stock-based awards to employees. SFAS No. 123 does not require an entity to
adopt those provisions, but, rather, permits continued application of APB
Opinion No. 25. We have elected not to adopt the recognition and measurement
provisions of SFAS No. 123 and continue to account for our stock-based employee
compensation plans under APB Opinion No. 25 and related interpretations. In
accordance with APB Opinion No. 25, compensation is generally recorded for
stock-based employee compensation grants based on the excess of the market value
of the common stock on the measurement date over the exercise price. If the
exercise price of the stock-based compensation is equal to or exceeds the market
price of our common stock on the grant date, no compensation expense is
recorded.
For the three and six months ended June 30, 2004 and 2003, the Company was not
required to record compensation expense for stock option grants.
Had compensation cost for the stock-based employee compensation plans been
determined based on the fair values of awards on the grant date, estimated using
the Black-Scholes option pricing model, which would be consistent with the
method described in SFAS No. 123, the Company's reported net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts shown
below:
- 10 -
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
--------------------------------------------
2004 2003
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Income (Loss) as Reported........................... $ (161) $ 2
Deduct: Amount by which stock-based employee
compensation as determined under fair value
based method for all awards exceeds the
compensation as determined under the intrinsic
value method................................... $ (25) $ (1)
Pro Forma Net Income (Loss)............................. $ (186) $ 1
Basic Earnings (Loss) Per Share as Reported............. $ (0.01) $ 0.00
Pro Forma Basic Earnings (Loss) Per Share............... $ (0.01) $ 0.00
Diluted Earnings (Loss) Per Share as Reported........... $ (0.01) $ 0.00
Pro Forma Diluted Earnings (Loss) Per Share............. $ (0.01) $ 0.00
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
2004 2003
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Income (Loss) as Reported........................... $ (158) $ 245
Deduct: Amount by which stock-based employee
compensation as determined under fair value
based method for all awards exceeds the
compensation as determined under the intrinsic
value method................................... $ (50) $ (58)
Pro Forma Net Income (Loss)............................. $ (208) $ 187
Basic Earnings (Loss) Per Share as Reported............. $ (0.01) $ 0.02
Pro Forma Basic Earnings (Loss) Per Share............... $ (0.01) $ 0.01
Diluted Earnings (Loss) Per Share as Reported........... $ (0.01) $ 0.01
Pro Forma Diluted Earnings (Loss) Per Share............. $ (0.01) $ 0.01
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transaction and Disclosure - An
Amendment of FASB Statement No. 123." This Statement provides alternative
accounting for stock-based employee compensation and requires prominent
disclosures in both annual and interim financial statements about the method
used in reporting results. The Company has elected not to adopt the recognition
and measurement provisions of SFAS No. 123 and continues to account for its
stock-based employee compensation plans under APB Opinion No. 25 and related
interpretations and, therefore, the transaction provisions will not have an
impact on the Company's financial position or results of operations. The
required expanded interim disclosures are provided above.
- 11 -
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CERTAIN OF THE MATTERS DISCUSSED IN THIS REPORT, INCLUDING, WITHOUT
LIMITATION, MATTERS DISCUSSED UNDER THIS ITEM 2, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT) AND ARE SUBJECT TO THE OCCURRENCE OF CERTAIN
CONTINGENCIES WHICH MAY NOT OCCUR IN THE TIME FRAMES ANTICIPATED OR OTHERWISE,
AND, AS A RESULT, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
STATEMENTS. THESE CONTINGENCIES INCLUDE, AMONG OTHER THINGS, RISKS ASSOCIATED
WITH INCREASED COMPETITION, CUSTOMER DECISIONS, THE SUCCESSFUL COMPLETION OF
CONTINUING DEVELOPMENT OF NEW PRODUCTS, THE SUCCESSFUL NEGOTIATION, EXECUTION
AND IMPLEMENTATION OF ANTICIPATED NEW SOFTWARE CONTRACTS, THE SUCCESSFUL
ADDITION OF PERSONNEL IN THE MARKETING AND TECHNICAL AREAS AND OUR ABILITY TO
COMPLETE DEVELOPMENT AND SELL AND LICENSE OUR PRODUCTS AT PRICES WHICH RESULT IN
SUFFICIENT REVENUES TO REALIZE PROFITS.
OVERVIEW
We are a supplier of software products for the property and casualty
insurance industry, supplying a wide range of professional services that support
product customization, conversion from existing systems and data integration
with other software or reporting agencies. We also offer on-going support
services including incorporating recent insurance rate and rule changes in our
solutions. These support services also include analyzing the changes,
developments, quality assurance, documentation and distribution of insurance
rate and rule changes.
We earn revenue from software contract licenses, service fees from ASPs,
continuing maintenance fees for servicing the product and professional services.
Total revenue for the three and six months ended June 30, 2004 increased to
$1,927,000 and $3,821,000, respectively, from $1,724,000 and $3,782,000,
respectively, for the three and six months ended June 30, 2003, mainly due to an
increase in license revenue.
The following is an overview of the key components of our revenue and
other important financial data for the three and six months ended June 30, 2004:
SOFTWARE LICENSES. We signed one new customer license in the first six
months of 2004. Our license revenue in the three and six months ended June 30,
2004 of $444,000 and $787,000, respectively, was from one new customer and
existing customers who chose to renew, add onto or extend their use of our
software. For the three and six months ended June 30, 2003, we generated $58,000
and $288,000, respectively, in license revenue.
MAINTENANCE. The increase in maintenance revenue, from $1,114,000 and
$2,236,000, respectively, in the second quarter and first half of 2003 to
$1,141,000 and $2,302,000, respectively, in the same periods in 2004, was mainly
due to annual increases to existing customers.
PROFESSIONAL SERVICES. The decrease in professional services revenue,
from $398,000 and $939,000, respectively, in the three and six months ended June
30, 2003 to $188,000 and $423,000, respectively, in the same periods of 2004,
was a result of decreased demand for customizations from our current customer
base.
ASP SERVICES. ASP services revenue was $153,000 and $319,000 in the
three and six months of 2003 compared to $154,000 and $308,000, respectively, in
the same periods in 2004.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (BENEFIT). Income (loss)
before provision for income taxes (benefits) was $(161,000) and $(158,000) in
the three and six months ended June 30, 2004 compared to $2,000 and $269,000,
respectively, in the same periods of 2003 primarily due to a reduction in
professional services revenue and an increase in sales and marketing expenses.
NET INCOME (LOSS). Net income (loss) for the three and six months ended
June 30, 2004 decreased to $(161,000) and $(158,000), respectively, from $2,000
and $245,000 in the same periods of 2003 as a result of a reduction in
professional services revenue and an increase in sales and marketing expenses.
CASH FLOW. We generated $177,000 in positive cash flow from operations
in the first six months of 2004 and ended the period with $711,000 in cash and
cash equivalents and $1,115,000 in accounts receivable.
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We continue to face several challenges to growth in 2004 mainly in the
marketing and selling of our products and services to new customers. In
addition, there are risks related to customers' acceptance and implementation
delays which could affect the timing and amount of license revenue we are able
to recognize. In response to these challenges, we have increased our sales and
marketing effort. Consequently, we are incurring additional sales and marketing
expense in advance of generating the corresponding revenue.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the consolidated statements of operations expressed as a percentage of
total revenues:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
License 23.1% 3.4% 20.6% 7.6%
Maintenance 59.2 64.6 60.3 59.1
Professional Services 9.7 23.1 11.1 24.8
Applications Service Provider ("ASP")
Services 8.0 8.9 8.0 8.5
------------ ------------ ------------ ------------
TOTAL REVENUES 100.0 100.0 100.0 100.0
------------ ------------ ------------ ------------
COST OF REVENUES:
License 18.0 11.4 17.5 10.7
Maintenance 38.3 36.5 35.9 34.2
Professional Services 5.6 6.5 6.0 6.9
ASP Services 0.9 3.0 1.1 3.0
------------ ------------ ------------ ------------
TOTAL COST OF REVENUES 62.8 57.4 60.5 54.8
------------ ------------ ------------ ------------
DIRECT MARGIN 37.2 42.6 39.5 45.2
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and Marketing 19.6 17.2 17.5 13.2
General and Administrative 15.0 16.3 15.4 15.4
Research and Development 8.4 6.2 8.2 7.0
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 43.0 39.7 41.1 35.6
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (5.8) 2.9 (1.6) 9.6
------------ ------------ ------------ ------------
OTHER EXPENSE (INCOME):
Interest Expense 2.6 3.0 2.6 2.7
Interest Income (0.1) (0.2) (0.1) (0.2)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE (INCOME) 2.5 2.8 2.5 2.5
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (8.3) 0.1 (4.1) 7.1
------------ ------------ ------------ ------------
INCOME TAXES (BENEFIT): -- -- -- 0.6
------------ ------------ ------------ ------------
NET INCOME (LOSS) (8.3)% 0.1% (4.1)% 6.5%
------------ ------------ ------------ ------------
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THREE AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 2003
Total revenues for the three months ended June 30, 2004 were $1,927,000
as compared to $1,724,000 for the same period in 2003, an increase of 11.8%.
License fees were $444,000 for the three months ended June 30, 2004 compared to
$58,000 in the same period in 2003 as a result of one new customer sale and
sales to existing customers in 2004. For the three months ended June 30, 2004,
maintenance revenues were $1,141,000 compared to $1,114,000 in the same period
of the prior year. Professional services revenue contributed $188,000 in the
three months ended June 30, 2004 compared to $399,000 in the second quarter of
2003, as a result of decreased demand for customizations from our current
customer base. For the three months ended June 30, 2004, ASP revenues were
$154,000 as compared to $153,000 in the same period for the prior year. For the
six months ended June 30, 2004, total revenues were $3,821,000 compared to
$3,782,000 in the same period of the prior year.
Cost of sales increased to $1,211,000 and $2,312,000 for the three and
six months ended June 30, 2004 as compared to $989,000 and $2,071,000 for the
same periods in 2003, due to staff-related expenses. Non-cash capitalized
software amortization was $243,000 and $487,000 for the three and six months
ended June 30, 2004 as compared to $120,000 and $241,000 for the same periods in
2003. We capitalized $238,000 and $594,000 of software development costs in the
three and six months ended June 30, 2004 as compared to $293,000 and $444,000 in
the same periods in 2003.
Research and development expenses were $161,000 and $313,000 for the
three and six months ended June 30, 2004 compared to $106,000 and $267,000 for
the same periods in 2003. We continue to enhance the functionality of our
products and to refine our processes in response to customer needs.
Sales and marketing expenses were $379,000 and $670,000 for the three
and six months ended June 30, 2004 as compared to $298,000 and $498,000 in the
same periods of 2003 primarily due to an increase in staffing and advertising
and promotion expenses in 2004.
General and administrative expenses were $288,264 and $588,000 in the
three and six months ended June 30, 2004 as compared to $280,000 and $584,000 in
the same periods in 2003 primarily due to an increase in staffing costs in the
first six months of 2004.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily from cash flow from operations
and the proceeds from our 2008 Debentures and 2009 Debentures.
At June 30, 2004, we had cash and cash equivalents of $711,000 compared
to cash and cash equivalents of $1,416,000 at June 30, 2003. The decrease in
cash and cash equivalents is primarily attributable to the reduction in
professional services sales and an increase in sales and marketing expenses.
The 2008 Debentures were issued with an aggregate principal amount of
$1,800,000, and the 2009 Debentures were issued with an aggregate principal
amount of $700,000. Interest on the unpaid principal amount of the debentures is
payable monthly at the rate of 8% per annum. We made approximately $100,000 of
interest payments on the debentures during the first six months of 2004 and
2003. The 2008 Debentures and 2009 Debentures mature on July 1, 2008 and
September 1, 2009, respectively, unless the debentures are earlier redeemed by
us or the holder upon the occurrence of certain events specified in the
debentures or converted into shares of our common stock at the holder's option
at a conversion price of $0.30 per share, subject to adjustment. We may redeem
the debentures for cash at 101% of the principal amount, together with accrued
and unpaid interest through the redemption date, upon the occurrence of certain
events specified in the debentures.
If the 2008 Debentures and 2009 Debentures are not sooner redeemed or
converted, we will be required to pay, commencing on July 1, 2004 and July 1,
2005, respectively, monthly principal installments in the amount of ten
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dollars ($10) per thousand dollars ($1,000) of the then remaining principal
amount of such debentures, and at maturity we will be required to pay the
remaining unpaid principal amount. As of June 30, 2004, we were in compliance
with the financial covenants set forth in the convertible loan agreements
governing these debentures.
In July 2004, the holders of the 2008 Debentures elected to convert an
aggregate of $90,780 in principal of such debentures, representing their monthly
installments of principal under such debentures (in lieu of receiving such
installment payments in cash), for shares of our common stock at the conversion
price of $0.30 per share. At July 31, 2004, after giving effect to the
conversion, the 2008 Debentures have an aggregate outstanding principal amount
of $2,409,220.
At June 30, 2004, we had a working capital deficit of $(191,000)
compared to working capital of $385,000 at June 30, 2003.
At December 31, 2003, we had approximately $21,900,000 of federal net
operating tax loss carryforwards expiring at various dates through 2023.
We believe that our current cash balances and anticipated cash flows
from operations will be sufficient to meet our normal operating needs for at
least the next twelve months. Material risks to cash flow from operations
include delayed or reduced cash payments accompanying sales of new licenses or a
decline in our services business. There can be no assurance that changes in our
plans or other events affecting our operations will not result in materially
accelerated or unexpected expenditures. In addition, there can be no assurance
that additional capital, if needed, will be available on reasonable terms, if at
all, at such time as we require.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." FIN 46 was revised in December 2003.
FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. In general, it is effective for periods
ending on or after March 31, 2004. We believe that we have no unconsolidated
variable interest entities that would be considered under the requirements of
FIN 46.
In April 2003, the FASB issued Statement of Financial Accounting
Standards no. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"), which clarifies accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for contracts entered into or modified after September 30, 2003 and
for hedging relationships designated after September 30, 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("SFAS 150"), which established standards for how
an issuer classifies and measures certain financial instruments. SFAS 150
requires that an issuer classify certain financial instruments as liabilities
(or assets in some circumstances) that were previously classified as equity.
Financial instruments which embody an unconditional obligation requiring the
issuer to redeem or repurchase it by the transfer of assets or by issuing a
variable number of its equity shares must be classified as a liability. SFAS 150
is effective for financial instruments entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003.
We expect that the adoption of the new FASB statements will not have a
significant impact on our financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to the impact of interest rate changes and
changes in the market value of its investments.
INTEREST RATE RISK. The Company's exposure to market rate risk for
changes in interest rates relates primarily to the Company's investment
portfolio. The Company has not used derivative financial instruments in its
investment portfolio. The Company invests its excess cash in a major bank money
market account. The Company protects and preserves its invested funds by
limiting default, market and reinvestment risk.
Investments in this account carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely impacted due to a
rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, the
Company's future investment income may fall short of expectations due to changes
in interest rates or the Company may suffer losses in principal if forced to
sell securities which have declined in market value due to changes in interest
rates.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of the Company's "disclosure controls
and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, as amended). Based upon that evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission (the "SEC") rules and forms, and include
controls and procedures designed to ensure that information required to be
disclosed by us in such reports is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial
reporting during the quarter ended June 30, 2004 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
* * * * * * * * *
Statements in this Form 10-Q, other than statements of historical information
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks which may cause the
Company's actual results in future periods to differ materially from expected
results. Those risks include, among others, risk associated with increased
competition, customer decisions, delays in productivity programs and new product
introductions, and other business factors beyond the Company's control. Those
and other risks are described in the Company's filings with the SEC over the
last 12 months, copies of which are available from the SEC or may be obtained
upon request from the Company.
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PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The partial conversion in July 2004 of an aggregate of $90,780 in principal of
our 2008 Debentures resulted in the issuance of a total of 302,597 shares of our
common stock to the holders of such debentures. No cash proceeds were received
by us in connection with the partial conversion of the 2008 Debentures. The
shares of our common stock issued upon the conversion of the debentures were
issued exempt from registration in reliance on Section 3(a)(9) of the Securities
Act of 1933 as an exchange of securities by an issuer with its existing security
holders where no commission or other renumeration was paid or given directly or
indirectly for soliciting such exchange.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of our Stockholders was held on June 17, 2004. At that
meeting, our stockholders elected one director, G. Russell Cleveland, to serve
for a three-year term and until his successor has been duly elected and
qualified. In addition, the stockholders approved the ratification of the
appointment of Moore Stephens, P.C., as independent accountants for the fiscal
year ending December 31, 2004.
The results of the voting are as follows:
PROPOSAL 1 - ELECTION OF DIRECTORS
DIRECTOR VOTES FOR VOTES WITHHELD
G. Russell Cleveland 12,715,757 7,174
PROPOSAL 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
VOTES FOR VOTES AGAINST VOTES WITHHELD
12,696,618 5,564 20,749
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
10(i)(11) First Amendment to 8.00% Convertible Debentures Due 2009 and
Second Amendment to 8.00% Convertible Debentures Due 2008,
dated as of June 29, 2004.
10(i)(12) Third Amendment to the Convertible Loan Agreements, dated as
of June 29, 2004, by and among the Company, Renaissance US
Growth & Income Trust PLC, BFSUS Special Opportunities Trust
PLC and Renaissance Capital Group, Inc.
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10(i)(13) Form of Revised 8.00% Convertible Debenture Due 2008.
10(i)(14) Form of Revised 8.00% Convertible Debenture Due 2009.
31.1 Chief Executive Officer Certification Pursuant to Section
13a-15(e) of the Securities Exchange Act.
31.2 Chief Financial Officer Certification Pursuant to Section
13a-15(e) of the Securities Exchange Act.
32.1 Certification of John W. Roblin pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Ann F. Massey pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K.
A Current Report on Form 8-K was furnished May 12, 2004, reporting under Item
12, "Results of Operations and Financial Condition," Cover-All Technologies
Inc.'s revenues and earnings from operations for the quarter ended March 31,
2004.
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SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVER-ALL TECHNOLOGIES INC.
Date: August 13, 2004 By: /s/ John W. Roblin
-----------------------------------------
John W. Roblin, Chairman of the Board of
Directors, President and Chief Executive
Officer
Date: August 13, 2004 By: /s/ Ann F. Massey
-----------------------------------------
Ann F. Massey, Chief Financial Officer
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